Flexible Prices and Wages: the Great Equalizers

In what I believe is the first thing that I ever published in the Foundation for Economic Education[2]‘s venerable monthly publication, The Freeman, I argue in this 1989 essay that minimum-wage legislation creates a buyers’ market for low-skilled workers[3]. It does so by causing there to be surpluses of such workers on the labor market. (I did not fall back then, and I do not fall today, for the fanciful tale that employers of low-skilled workers in the United States have monopsony power – or, that these employers have any more monopsony power in the market for low-skilled labor than do, say, sellers of laundry detergent or mid-sized sedans have monopoly power in the market for detergent or automobiles. The monopsony-power allegation simply does not pass the smell test.)

If you were a low-skilled worker, would you prefer to sell your labor services in a buyers’ market for such labor, or in a market that, if not a sellers’ market, is also not a buyers’ market? To ask this question is to answer it.

Here’s a slice from my 1989 essay:

Because there are more people who want jobs at the minimum wage rate than there are jobs to go around, employers have little incentive to treat unskilled workers with respect. If an employer mistreats an unskilled worker, the employer need not be concerned if the worker quits. After all, there are plenty of unemployed unskilled workers who can be hired to fill positions vacated by workers who quit.

In addition, the permanent buyers’ market created by the minimum wage encourages employers to discriminate in their hiring and firing decisions on the basis of sex, race, religion, and so on. Suppose an employer has two minimum-wage jobs available, but there are ten unskilled workers who apply for the jobs. Because the workers are prohibited from competing with each other on the basis of wage rates, other factors must determine which of the workers will be hired. If the employer dislikes blacks, and if there are at least two non-black workers who have applied for employment, no black workers will be hired. With a surplus of unskilled workers, there is no economic incentive to stop this bigoted employer from indulging his prejudices.

Flexible prices and wages are great equalizers of bargaining power. When the price of a good or service is at its market-clearing (“equilibrium”) level, the bargaining power of even the poorest buyer is equal to that of the wealthiest seller, and the bargaining power of even the poorest and most desperate seller is equal to that of the wealthiest and most patient buyer.